Foyle, Inc., had 680,000 shares of common stock issued and outstanding at December 31, 2014. On July 1, 2015, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2015. The average market price of Foyle's common stock was $20 during 2015. What is the number of shares that should be used in computing diluted earnings per share for the year endedDecember 31, 2015?

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Quizplus · Accepted Answer

To compute diluted earnings per share, we start with the basic shares outstanding and adjust for the effects of dilutive securities like stock options. Foyle had 680,000 shares at the beginning of the year. On July 1, an additional 40,000 shares were issued, so for half the year, there are 720,000 shares outstanding. The weighted average shares for the year would be 680,000 for half the year plus 720,000 for the other half, which averages to 700,000 shares. The stock options would be considered dilutive since the average market price ($20) is above the exercise price ($15). Using the treasury stock method, we calculate the additional shares that would be issued from the exercise of options and subtract the shares that could be bought back with the proceeds. The calculation is 32,000 options * ($20 market price - $15 exercise price) / $20 market price = 8,000 shares. Therefore, the total number of shares for diluted EPS is 700,000 + 8,000 = 708,000 shares.